An overview of markets in Q1, when the conflict in the Middle East saw commodities gain while other asset classes declined.

The quarter in summary:

Global equities fell in the quarter amid weakness in some US technology stocks and the escalation of conflict in the Middle East. Higher oil prices saw commodities outperform. Government bonds experienced a sell-off as those higher commodity prices fuelled worries over inflation and potential interest rate rises.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Global equities

Developed market shares, as measured by the MSCI World index, fell in Q1. A combination of weakness in US software stocks and risk aversion caused by the conflict in the Middle East weighed on global equities. Japan was an outlier with positive returns for the quarter in the wake of February’s elections. Emerging market stocks fared better than their developed market counterparts with gains for the technology-heavy Korea and Taiwan markets early in the quarter.

US

US shares experienced significant volatility in the first quarter of 2026 and the S&P 500 Index fell 4.3%. That marked the weakest quarter for US large caps since 2022.

The year had started favourably with the support of solid economic fundamentals, including a robust labor market, easing inflationary pressures and steady consumer spending. The market reached a record high by mid-January, as investors anticipated continued earnings growth across multiple sectors. Some volatility did occur in late January and through February, as investors worried that strong economic growth could delay any further interest rate cuts by the US Federal Reserve.

Geopolitical events at the end of February brought far greater concerns. The US and Israeli strikes on Iran disrupted the flow of oil through the Strait of Hormuz and created considerable uncertainty for the global economy and financial markets. The surge in oil prices and increased risk aversion among investors caused stocks to retreat. Throughout March, investor sentiment vacillated between hopes for de-escalation and fears of a prolonged conflict.

Energy stocks were the standout performers for the quarter, as integrated producers, refiners and energy infrastructure companies all benefited from higher oil prices. Basic materials companies—such as miners, chemical producers and commodity processors—also fared well because they could sell their products at higher prices amid the supply disruptions caused by the Iran conflict.

For reasons apart from geopolitics, information technology stocks declined during the quarter. That drop came even though many companies reported solid revenue growth. The software sector was particularly hard hit. The evolving AI narrative has created a dichotomy within technology. Investors rotated towards AI infrastructure businesses such as semiconductors, cloud computing and data-centre providers, and away from traditional software stocks over concerns that generative AI could undermine the software-as-a-service subscription model the industry has relied on for years.

Eurozone

Eurozone shares fell in the quarter with the declines concentrated in March following the outbreak of hostilities in the Middle East. The energy sector soared amid higher oil prices as the conflict affected both oil production and shipping. Some of the steepest declines came in the economically sensitive consumer discretionary sector.

There was divergence within information technology. Software stocks came under significant pressure due to the threat of disruption by AI. However, hardware and semiconductors fared better, with positive returns after some well-received corporate earnings.

The inflationary threat posed by higher oil prices clouded the picture for eurozone interest rates. In February, European Central Bank (ECB) President Christine Lagarde said inflation was “in a good place”. Interest rates were then kept on hold at the March meeting, but Lagarde said the ECB could raise rates “at any meeting” if higher energy prices risked causing a surge in inflation.

Annual inflation in the euro area was 2.5% in March, up from 1.9% in February, according to an estimate from Eurostat. The flash eurozone composite purchasing managers’ index (PMI) indicated a slowdown in economic activity in March, with a reading of 50.5 compared the February’s 51.9 outturn. (The PMI surveys are compiled from responses by businesses. A reading above 50 indicates economic expansion; below 50 indicated contraction).

In February, France adopted a budget for 2026, ending months of deadlock. The budget aims to increase defense spending and reduce the deficit to 5% of GDP by the end of 2026 from 5.4% at the end of 2025.

UK

The FTSE All-Share index registered a positive return for the quarter. Gains were supported by the relatively large weighting of the energy sector, along with weaker sterling which helped export-oriented larger companies. There were also with advances for basic materials, telecommunications, and healthcare. Within healthcare, some large pharmaceutical stocks performed well amid robust corporate earnings and deals to boost drug pipelines. The technology and consumer discretionary sectors saw the sharpest declines.

Within the UK index, large cap stocks outperformed while the more domestically focused FTSE 250 index posted a negative return for the quarter.

As in the eurozone, the outlook for interest rates in the UK changed amid rising energy prices caused by the conflict in the Middle East. In the early part of the quarter, markets were anticipating interest rates cuts this year, including as soon as March. However, the Bank of England kept interest rates steady at 3.75% in March and struck a hawkish tone, which markets interpreted to mean that rates rises are likely this year.

Meanwhile, data from the Office for National Statistics showed that the UK economy grew by just 0.1% year-on-year in Q4 2025. UK inflation was steady at 3.0% in February.

Japan

Japanese equities delivered positive returns overall for the quarter. In particular, stocks rose strongly in February after a landslide victory for the LDP in the House of Representatives election. This boosted expectations for political stability and pro-growth “high-pressure economy” policies.

However, as in other regions, Japanese equities experienced a pullback in March. This was largely due to external—most notably the Middle East conflict, higher energy prices, and energy supply concerns—and, to a lesser extent, attention on private credit and lending to business development companies.

In March, the Bank of Japan left interest rates unchanged at 0.75%, as expected, but warned that higher energy prices risk stoking underlying inflation. During the month, worries that the conflict could be prolonged and push energy prices higher intensified, contributing to a sharp pullback in global equities including Japan on fears of stagflation.

Emerging markets

Emerging markets (EM) delivered slightly negative performance in Q1 2026, outperforming the MSCI World Index. EM returns were driven by the large technology-oriented markets of Korea and Taiwan, alongside strong performance from Latin American countries, while India remained a notable drag.

It was a tale of two differing market themes over the quarter, with Taiwan and Korea leading strong EM outperformance in January and February, supported by a weaker US dollar and ongoing strength in AI-related technologies. However, the Middle Eastern conflict led to a sharp reversal in March, as high energy costs, supply chain disruptions and uncertainty weighed heavily on global risk sentiment, particularly for energy importing EM countries, notably Korea, Taiwan and India.

The Latin American markets of Colombia, Brazil and Peru were the top-performing markets in the quarter. Korea outperformed, posting double digit returns in dollar terms, driven by ongoing strength in the technology sector particularly memory-related stocks. Saudi Arabia also outperformed as the market benefited from rising oil prices and the country’s ability to export oil via its Red Sea oil export facility Yanbu. Strong gains were also made by Taiwan, supported by ongoing strength in AI, despite a correction in March due to the market’s energy price sensitivity, especially in energy intensive semiconductor and technology stocks.

South Africa lagged broader EM peers amid higher oil prices, currency depreciation and inflation concerns, although this was somewhat offset by higher precious metals prices during the quarter. Egypt, Kuwait, Qatar and the UAE also ended the quarter behind the index, largely owing to their proximity to Iran.

China underperformed as AI-related advancements pressured internet stocks, although the country was better positioned to absorb spillover from the Middle Eastern conflict given its large oil reserves and diversified energy mix. India was one of the largest underperformers with growth concerns, reliance on oil imports and expensive valuations weighing on the market.

Asia ex Japan

Asia-Pacific ex Japan equities posted negative returns in the first quarter. After experiencing strong performance in January and February, many countries and sectors saw a sharp sell-off in March in response to the conflict in the Middle East. Brent crude prices rose above $100, and that triggered a risk-off sentiment toward energy-importing countries.

South Korea ended the quarter positive only because strong demand for AI-related semiconductors had propelled substantial gains in January and February. The conflict in the Middle East, however, brought a dramatic sell-off in March, as investors worried about the impact of higher oil prices on South Korea’s energy dependent economy. Thailand also posted gains. Optimism early in the quarter had been fuelled by a surge in exports and expectations that the pro-business Bhumjaithai Party’s election victory could end years of political instability.

Indonesian stocks fell after MSCI signalled an interim freeze on adding Indonesian companies to indexes because of concerns about limited corporate transparency and opaque ownership structures. India also underperformed for the quarter amid a weaker rupee and rising energy costs. Chinese equities were down in the first quarter, as well, in response to slow domestic growth and weaker export demand.

Global bonds

In global government bond markets, US Treasuries proved most resilient to the events of the quarter, while yields rose more sharply in other major markets (yields move inversely to prices). There were a number of events during the quarter behind the increased market uncertainty, although the conflict in Iran dominated markets in March.

In the US, the Supreme Court ruled that the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose broad based tariffs was unconstitutional. ln response, the administration signalled that it would use a temporary authority to impose 10% global tariffs.

US interest rates remained on hold over the quarter at 3.5%-3.75%. Kevin Warsh was nominated by President Trump to replace Jerome Powell as the next Federal Reserve (Fed) Chair. Relative to other candidates reported to have been under consideration, Warsh is perceived as one of the more market friendly choices. While he has been supportive of lower rates, he has also been a proponent of the Fed’s balance sheet reduction.

Meanwhile, signs of labor market weakness and increased anxiety over AI-driven business disruption saw markets begin to anticipate US interest rate cuts later in the year.

In March, the war in the Middle East dominated markets, introducing volatility and a significant sell-off in government bonds. While there was some regional divergence, government bond yields rose across the board. The energy price shock and the potential pass-through into inflation saw the market pricing in interest rate hikes, even in some countries where previously rate cuts were priced.

At the Fed’s March meeting, Chair Powell noted that the Fed would need to see further “progress on inflation” in order to cut rates this year in light of its dual mandate (which also includes a focus on employment).

European government bond markets underperformed the US, with the region’s reliance on energy imports raising market concerns over more persistent inflation. The European Central Bank (ECB) left the deposit rate unchanged at 2%, with President Lagarde stating that they are “well positioned and well equipped to deal with a major shock”.

The market reaction in gilts was more severe. In February, the Bank of England (BoE) had kept rates unchanged at 3.75% but the vote was split with four members voting for a cut, which investors thought likely to come as soon as the March meeting. However, given the rapid rise in energy prices, the March meeting instead brought a hawkish response with all nine committee members calling for the base rate to be held at 3.75%.

In credit markets, US corporate bonds outperformed their European counterparts in both investment grade and high yield. (Investment grade bonds are issued by borrowers with higher credit ratings and a lower perceived risk of default. High yield bonds are issued by borrowers with lower credit ratings and therefore offer higher yields to compensate for higher default risk.)

Commodities

Commodities delivered substantial returns in the quarter with the S&P GSCI index up 40% (source: FactSet, US$). The energy component soared amid disruption to Middle East production and shipping. The conflict effectively closed the Strait of Hormuz, through which flows c.20% of global oil supply as well as a significant proportion of liquified natural gas (LNG) and other commodities such as fertilisers. Saudi Arabia was able to divert some oil supply via its East-West pipeline. There was some damage to energy infrastructure, including to Qatar’s Ras Laffan LNG facility.

Elsewhere, the agriculture, livestock and industrial metals components registered smaller positive returns. Precious metals also registered a positive return for the quarter but saw sharp declines in March. Those falls in March may have partly been due to profit taking after a strong run previously for both metals. Additionally, expectations of higher interest rates weighed on the attraction of gold and silver which offer no yield.

Digital assets

Digital asset markets experienced a difficult quarter. March offered a partial recovery after January and February’s painful consecutive drawdowns. Digital asset markets remain caught between two competing narratives. The regulatory infrastructure underpinning long-term institutional adoption has never been more developed, yet near-term price action continues to reflect macro-driven risk-off behavior.

March produced significant regulatory progress in the US. On 17 March, the Securities and Exchange Commission (SEC) and Commodities Future Trading Commission (CFTC) issued a landmark joint interpretation classifying 16 digital assets as digital commodities under CFTC jurisdiction.

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